EUR 5y5y at new high as oil gains, nominals bear-steepen
Despite a third day of risk-off losses for the Euro Stoxx, inflation held near its recent highs as the market absorbed Spanish linker supply against a background of nominal bear-steepening and rising energy prices. Brent rose by two dollars after Saudi Arabia pledged to extend unilateral output cuts, while Dutch gas futures gained 6% after Norway confirmed a reduction in supply.
EUR 1y held just below 3% at 2.98% (+1bp) following yesterday’s drop but 5y5y finished at a new high of 2.63% (+0.25bps) and 10y10y was unchanged at 2.87% as the curve flattened a touch. OATei real yields rose by 1-6bps led by the long end as 30y USTs drove global steepening. And, after lagging yesterday, the front end of French inflation outperformed a touch today led by the 2y area of the FRF curve.
Spain’s modest €535m sale of the SPGBei-27 was covered a respectable 1.98 times at 0.866% and the bond outperformed its neighbours a tad on the day.
SDR swap flows included EUR 1y at 2.98%, 10y at 2.636% and what looks like 5y5y at 2.621% in €100m and 30y early doors at 2.84%.
Oil price gains start to threaten inflation dip: Barclays
Final euro inflation data are due on August 18 and Barclays’ latest tracking estimate, updated following the recent flash data, shows HICPx slowing to 5.28% (123.00) in July en route to 3.04% (123.89) at the end of 2023 and 1.94% (126.29) in Dec 2024, with core also seen back down to 2% by the end of next year. However, the bank is wary of the impact of rising oil prices after Brent futures tested $85.99 earlier this week, up from around $75 a month ago:
- “Our Euro Area inflation forecast and trackers assume services price momentum stays firm in Q3 23 supported by consumer demand for discretionary services before starting to gradually ease from Q4 23. Also, progressive disinflation across core goods items and adverse base effects should increasingly weigh on y/y core inflation.
“At the headline level, we continue to see a strong disinflationary potential in Euro Area food and utilities consumer prices, which likely explains the c.0.5pp wedge between our forecast and market expectations in late 2023 and early 2024. Indeed, we expect the pass-through of lower input costs into Euro Area inflation to accelerate in H2 23, provided that relatively low energy prices in Europe prevail until year-end. However, robust oil market price dynamics in July and observed processed food inflation stickiness, are increasingly challenging our baseline of Euro Area headline inflation briefly dipping below 2.5% y/y in October-November.”